The Power of Income Hosted by Vicky Thompson CEO of Valuation Management Group 1
The Power of Income Crispin Bennett Chief Appraiser
What is it? (For the Non-Appraisers in the room) The Income Approach to value • is based on the assumption that market value is related to the market rent or income that a property can be expected to earn. It’s all about ROI!
Question When do you actually attempt to complete the income approach… (Honesty please…nobody knows how you answer) 1. Only when the lender asks for it or requires it 2. I turn down the assignment and avoid it like the plague 3. Whenever income is dominant in the market 4. Only when the subject property is an investment property
Answer I actually attempt to complete the income approach… 1. Whenever the lender asks for it or requires it 2. I turn down the assignment and avoid it like the plague 3. Whenever income is dominant in the market 4. Only when the subject property is an investment property The income approach should be used, and is applicable, when the primary reason for the "investment" is based upon its ability to produce income.
Requirements for Income Approach: USPAP requires the appraiser to develop and report the result of any approach to value that • is necessary for credible assignment results. If the appraiser believes the income approach is necessary for credible assignment results, then the income approach must be included. FNMA requires the income approach to value in the valuation of 2-4 unit properties, and • also when appropriate in neighborhoods that consist of one-unit properties when there is a substantial rental market. – The income approach to value may not be appropriate in areas that consist mostly of owner-occupied properties because adequate rental data does not exist for those areas. Which is understood that when adequate rental data actually does exist in an owner- – occupied market, the income approach to value would likely be appropriate • Freddie requires completion of income approach on 2-4 family The factors that the market suggests are most important are considered. –
We won’t get in the weeds too far… but lets visit!
The Basics… How do you complete? The Most Common Income Approach for Residential: • GRM- By developing a Gross Rent Multiplier (GRM). This is used to value residential properties with 1-4 units, and is simply the sales price divided by the monthly rent: • GRM = Sales Price / Monthly Rent • QUESTION… Using what information? 1. Of the subject property or 2. Of comparable rental properties that have sold? The appraiser does not use the current rent being charged for the subject property, since it may not be the market rent, but uses recent rental information from comparable properties to arrive at a more accurate appraisal.
The Basics… How do you complete ? OR… if you cannot determine GRM, What about using a Cap Rate? The Capitalization Rate (aka cap rate), is the rate of return, that other investors of similar properties are getting in the local market. It seems difficult, but the principle is simple: – Effective Gross Income = Gross Income - Vacancy Rate - Rent Loss – Net Operating Income = Effective Gross Income - Operating Expenses – Capitalization Rate = Net Operating Income / Purchase Price or Property Value Therefore: Property Income Value = Net Operating Income / Capitalization Rate
STILL Can’t Find It ??!!! Too many appraisers are looking for a way out of providing the information when the going gets a little tougher, BUT your client needs you!
So… What Else Can I Do ??!!! So… You still can’t find data for either of the two methods? What do you do? You can derive the GRM from the Market • – There is a way to do this, Although it is not as widely taught or practiced as it used to be. It is a GRM developed by "Proxy".
So… What Else Can I Do ??!!! It is a GRM developed by "Proxy". The Proxy Method : Find three or more properties currently rented. Then find three or more sold properties that are the same or as similar to the rentals as possible. Make appropriate adjustments, if any. Then take the amount the properties sold for and assign the rents to the sold property by proxy. Then you can develop a GRM. Example: 3 properties currently rented for an average of $2,000.00 per month. 3 properties, after adjustment, that recently sold for an average of $250,000.00 $250,000/$2,000.00 = GRM of 125
Don’t Make Me Hyperventilate!! It is not acceptable to back into the income approach by using the rental information from the subject property to determine rents A Gross Rent Multiplier is based on facts. It is not a fictitious number. A Cap Rate is NOT a made up number based on… “experience in the market”… Like a true GRM, the Cap Rate is just simple math!
Where There Is A Will, There Is A Way This is the kind of thinking that separates the appraisers from the • machine, and makes you a valuable asset. The bottom line is not to just give up. Don’t just fight back because you • are afraid or do not want to do the work. There is usually a way to provide a supported answer It is ok to caveat as needed (don’t overdo it). • • The institution will use this information as part of a credit decision. 1. You are the professional 2. Who is better to make a determination than you 3. Just make sure and document the process so the reader understands the process
From The Lender • The income, photos, and comments are analyzed extensively inside the lending institution. • These are higher-touch transactions than a typical mortgage • The income stream must make sense to the lender in underwriting a loan • There are many checks and balances at different levels in the process… ESPECIALLY for non-owner occupied • Its easy to forget that it is more than just the next appraisal. Every loan is a life-changing event for the borrower. **CONGRATUALATIONS!!! YOU JUST HELPED SOLVE THE LENDING PROBLEM!
Crispin Bennett Chief Appraiser Finance of America cbennett@financeofamerica.com Disclaimer: The views and opinions expressed in this presentation are those of my own, and do not necessarily reflect the official policy or position of Finance of America. Examples of analysis performed within this presentation are only examples. They should not be utilized in real-world products.
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